Medical marijuana can be profitable

Sunday

Feb 9, 2014 at 6:00 AM

By Peter S. Cohan WALL & MAIN

So, Worcester is preparing to host a marijuana dispensary. But is there a prescription for profit when it comes to investing in marijuana? The answer is yes — as long as you only cultivate pot, and don't retail it.

As the T&G's John Monahan reported on Feb. 1, 9 Harrison St. will be converted by December from a vacant storefront into a medical marijuana dispensary, to be operated by Denver-based Good Chemistry of Massachusetts. Good Chemistry will both grow and retail marijuana.

Jaime Lewis, chief operating officer of Good Chemistry, told the T&G that it would operate a 22,000-square-foot cultivation facility at 6 Pullman St., Worcester, and the 3,000-square-foot dispensary on Harrison Street. Good Chemistry expects to generate a profit of $400,000 after subtracting the $3.5 million in expenses that it will pay out of its $3.9 million in revenues that she expects the Harrison Street retail store will generate.

There seems to be some controversy about whether marijuana is an effective medicine. For example, Massachusetts Medical Society President Ronald Dunlap released a statement that concluded there was still insufficient information about the safety of marijuana for medical use.

According to Mr. Dunlap, "Patients should remember that marijuana lacks the rigorous testing of drugs approved by the Food and Drug Administration; that claims for its effectiveness have not been scientifically proven; and, that it poses health risks of toxins and cognitive impairment. Implications for occupational health and safety are other questions raised by marijuana use."

Matthew J. Allen, head of the pro-marijuana Massachusetts Patient Advocacy Alliance, begs to differ. He noted, "I would wholeheartedly disagree. There are thousands of publications in peer-reviewed journals from clinical studies."

Nonetheless, Massachusetts passed a medical marijuana law — making it the 18th in the U.S. to pass one. And the law allows for no more than 35 dispensaries in the state with at most five in each county.

And it looks like the sun will set on 2014 with medical marijuana being sold in Worcester. But whether marijuana is effective medicine or not, there is less uncertainty about whether it's a profitable investment.

The profit is in doing what is more difficult and more highly prized, rather than what is relatively easy to do. To understand what I am talking about, it helps to examine the medical marijuana industry value network. By that I refer to the chain of industries that start with the raw materials — such as seeds, fertilizer and pesticides — and end with the consumer.

The cultivators take those raw materials and grow marijuana plants, harvest them and sell them to the dispensaries. And there are many industry participants who go along for the ride, including lawyers, accountants, independent testers — who make sure there are no mites, molds, mildew or pesticides in the pot and that it has the right levels of THC (it causes the high) and cannabinoids (the medicine), as well as physicians who prescribe it.

The best cultivators can take home 50 cents of every dollar's worth of marijuana that they sell to retailers. But the typical dispensary only keeps a nickel of every dollar's worth of pot that it sells to a patient.

For that insight, I credit Luigi Zamarra, the nation's leading medical marijuana accountant. Based in Oakland, Calif., Mr. Zamarra explained in a Feb. 3 interview, "I have done benchmarking studies and I have reviewed the records for 70 to 80 businesses. I have so many clients that I can average out all of them and provide figures for the typical cultivator and dispensary."

Dispensaries are less profitable than cultivators. Mr. Zamarra said, "A 3,000-square-foot dispensary will typically generate gross revenues of $3 million. Half of that will be the cost of the raw product. If you add onto that the cost of packaging, lab testing and shrinkage, the fully-loaded variable cost is 60 percent of the gross. Payroll costs take away another 22 percent, rent is 10 percent, and when you subtract 5 percent for all other expenses, you're left with a 5 percent net profit margin."

If the retailer is vertically integrated — that is, it owns its own cultivator — then the typical cultivator would generate $1.5 million in revenue and would take half of that home as profit.

"If a cultivator is good, it can sell its product at $2,500 per pound — but if it's not as good, it might sell the product for $2,000 a pound for mid-grade marijuana. Utilities would take 7.5 percent of the gross; rent another 10 percent; skilled and unskilled labor would subtract about 23 percent; and 5 percent would be for everything else," said Mr. Zamarra.

It's difficult to be a good marijuana cultivator.

As Mr. Zamarra said, "It's hard. You've got to love plants. You have to keep out mites, mold and mildews. You have to maintain and keep an eye on the security cameras. You have to beat back criminals. You have to find buyers. And you have to pay the upfront costs — which are $70 a square foot for the build-out, and $70,000 to $90,000 for accountants, lawyers and permitting approvals."

If you're looking for an investment, cultivating medical marijuana sounds like it offers a good return — but it's not without risk.